Today’s post is late because I was attending a talk by Professor Lawrence H White on free banking (courtesy the Centre for Civil Society). Larry and I differ on fractional reserves, but what he said at the talk and later to us outside the classroom was hugely enlightening. This enlightenment will be reflected in future posts on money and banking.
Larry and I both concluded that departments of economics around the world have failed miserably in spreading basic knowledge on money and banking. Widespread economic illiteracy has been fostered by government-appointed academics. Plus, the central bank recruits thousands of these mistaught economists – adding to economic illiteracy.
In fact, Larry began by talking of “spontaneous order” – the idea that markets display “order without design” – and he said that there are two areas wherein modern man is simply unable to imagine how these two tasks can be left to the spontaneity of markets: one is money; and the other is education.
It would be best to tackle the education first. Once the exact understanding of money and banking is taught, money will be coming from the market too.
Topping my selections from today’s news is the story that the Ministry of Company Affairs has made a mess of storekeeping the records of 15,000 firms. These firms have to compulsorily register with them. I do believe that this is a fit case for “contracting-out.” Registration and record-keeping can easily be done by private competing firms on behalf of the government. Or because of the necessities of private law. Even land records (a total mess today) can be privatized. There can also be title insurance. This will allow for a free market in land.
From Delhi, the news is not good. Chief minister Shiela Dikshit wants to extend the Bus Rapid Transit corridor idea to more roads. If you travel on the BRT today, you get the feeling that our The State has done the exact socialist thing: they have stolen something from one group to deliver to another group – and this, while they benefit. Here, with the BRT, they have literally stolen the road – and given it to bus passengers. And they continue to benefit: Note that VVIP cars always travel on the bus lane.
The notoriously corrupt Delhi Development Authority (DDA) has also climbed greater heights in terms of predation. The news has it that their recent lottery of 5000 flats (among 1,50,000 applicants) was rigged. The minister might just cancel all the allotments and go in for another lottery. Why not just close the DDA down?
From Mumbai, the news is that a bookstore has been advised by the cops to remove books by Pakistani authors from its shelves – apparently on the orders of Raj Thuggeray. Now the intelligentsia of these two warring nations cannot communicate with each other. All communications will then be “official” – with our foreign secretary meeting theirs and so on, ad nauseam. The vital exchange of free ideas between free people will be stopped.
At least in Delhi I was luckier. I just picked up Ahmed Rashid’s book on the Taliban. Sorry, Raj Thuggeray, but I could not wait for a swadeshi journalist to write a book on the subject.
Nutts Rule Our Land.
After some reading and debating on Mises.org,I am now in the pro fractional reserves side. Fractional reserves would have existed even without the govt monoploy on money. FR is a queueing mechanism evolved by the market for the allocation of scarce resources like capital and existed even before the fed .
ReplyDeleteAn electric power company promises that everyone will be able to plug in their washing machines at any time.But in reality,if everyone does so that the same time, the grid would collapse. Similar argument could be made about the contract between banks and depositors. If you want a 100% deposit guarantee,you could opt for safety deposit boxes.A run on the bank is equivalent to everyone plugging in their washing machines at the same time.Yet,nobody argues that the power company is commiting fraud.
It is ultimately a question of The Law. Larry White agreed that all contracts must be upheld by the courts. The currency note is such a contract. Notes with option clauses would then trade at a discount against notes without such clauses. This would create a problem.
ReplyDeleteSecond: there is the question of what is moral banking and what is not. In my opinion, the creation of credit out of nothing - that is, allowing someone to purchase something for nothing - is immoral and should be illegal. If private bankers must be free, which they must, they must also conform to basic contract law. And giving out notes not backed by deposits, but backed by loans (and loans are "assets" for banks) - would lead to the same situation today, when too many banks are deemed "too big to fail." After all, banksters killed Peel's Banking Act of 1842 by allowing deposit money (loans) to soar. If central banking is to be abolished, and, with it, all "lenders of last resort," then private bankers must be bound by contracts in a "private law world." The critical problem lies in demarcating the areas of legitimate banking while outlining what is not legitimate banking. This is where differences lie.
i am not sure why morality needs to be applied to free market businesses.banking or non banking. a case for queuing of scarce resources makes a lot of sense.
ReplyDeleteloans can be assets or horrible liabilities.it all depends on the credit quality .so, free banking will probably ensure more due diligence by depositors/consumer groups.
Sauvik,
ReplyDeleteI agree with the principles you enunciate, but not the mistaken claim that redeemable (fractional-reserve) banknotes create credit out of nothing. The voluntary holding of redeemable banknotes is an extension of credit from noteholder to bank (it supplies loanable funds). To persuade people to hold its notes is costly for the bank, not gratuitous. The bank then intermediates the credit to its borrowers. Read what Selgin and I have written on FRB.